The Accounting Standards Regime
The Accounting Standards Regime
Abstract and Keywords
This chapter shows how the EU decided to adopt International Accounting Standards (IAS) from the International Accounting Standards Board (IASB) as official EU reporting standards, after most countries had already done the same at the national level. It shows therefore that delegation beyond the state was still built on national norms that had recently changed.
A New Regime
The EU's accounting standards regime is remarkable because it delegates standard‐setting to a private international organization with hierarchical governance structures. Both the member states and the European Commission continue to be involved in the process of formally adopting these standards, but national‐level actors are no longer the central actors in standard‐setting, as they were before 2005. Instead, the International Accounting Standards Board (IASB) became responsible for setting these standards. The EU's adoption of International Accounting Standards (IAS) played a significant role in the Board's introduction of structural changes in 2005 that transformed it from a collegial association of accountants, with influence limited to the English‐speaking world to a hierarchical, technocratic global standard setter. This was a constitutive change of the Board itself preceded by movements within the European member states to adopt IAS. The EU's decision to adopt IAS was formalized in 2001 with a corresponding directive. Since then, this decision has been built up steadily through the EU's adoption of further rulings by the IASB.
Commission and Member State Motivations
The European Commission promoted the idea of adopting IAS as a means to help complete the single market through the use of universally transparent accounting standards. National governments were moved more by internal reasons that made the adoption look attractive: attracting investment capital and responding to corporate governance scandals that brought attention to the quality of information reported. The first of these motives proved more important than the second in their adoption of IAS. This was the case because both countries sought to deal with corporate governance failures according to (p.223) their own strategies, including policies that dealt with company law and securities regulation rather than accounting practices.
Providing information to the investment community holds the promise of attracting further investment to the country, but it comes at a price. IAS led to a greater emphasis on financial information useful to outside shareholders and institutional investors and short‐term speculative interests. The shift from historical-value accounting in Britain and from commercial code‐based standards in Germany to fair‐value accounting, a practice that will be discussed in this chapter in more detail, provides outside investors with information about the current value of the firm's net income and assets at the expense of a long‐term perspective on the company's long‐term financial prospects. The British political economy has absorbed these changes quickly as part of its own efforts to render British financial reporting attractive to London capital market interests. Continental political economies, far less accustomed to opening company books to the scrutiny of financial markets and reporting earnings in a way that reflects their speculative interests, stand to come under greater pressure from financial markets to improve the value of their firms from quarter to quarter.
Subject to the Approval of the EU Through the IAS Committee
Theoretically, IAS have a direct effect on the companies of countries that have adopted them. In the EU, a special Accounting Regulatory Committee was created to discuss new standards issued by the IASB and to decide whether they will be adopted into the EU's IAS reporting requirements. This breaks the direct effect of IAS for the single market.
The EU seldom makes use of this instrument, but it has done where it considers the issue to be of great importance. This is discussed below in the case of IAS covering the treatment of financial derivatives, where a European solution outside the Board's rule system was created. The impact of the IASB is, therefore, almost complete, but not quite.
Implemented at the National Level
The European adoption of IAS is a firm requirement for listed companies under the 2001 EU directive, but national standards continue to be used (p.224) parallel to the international standards in many cases, and private actors continue to be involved in the standard‐setting process, despite the requirement for member states to have a statutory basis for accounting standards. This degree of slack provided a means by which points of conflict between international and national standards could be avoided and, therefore, potential political opposition to the adoption of IAS. Therefore, it ensured that potential conflicts at the national level over the consequences of adopting IAS could be contained and managed in line with the strategy of national decision‐makers. For this reason, we cannot treat the use of IAS at the national level in terms of compliance in the sense that deviations from IAS would constitute a violation of national commitments to implement them. Rather, the interesting point of comparison is whether and to what extent decision‐makers at the national level align their national standards with international ones and whether they attempt to exert influence on the formation of standards.
Pressures for Increased European Input
National delegations are already represented in an advisory body of the Board, but there is pressure to increase the clout of European actors on the Board, both public and private. The European Commission has made a claim that it ought to have official status on the advisory Board and a special relationship with the Board itself. The private sector has made a claim that their own European organization be given official standing to work with the Board as well. These claims are justified principally by the call for a balance of Anglo‐American and European voices in standard‐setting, and by the observation that as IAS' most important standard‐taker, Europe ought to have a significant say in how those standards are set.
All of this amounts to the delegation of standard principles to the IAS, a hierarchical private sector organization, but no unconditional application.
European Accounting Policy
The European Commission's preference on EU accounting policy was for harmonization of rules based on the model developed for the financial market regulation regime. The Commission had articulated a New Accounting Strategy as early as 1995 as part of a broader strategy to attract investors to the single market. Comitology procedures and Commission responsibilities were (p.225) foreseen, but with the involvement of an outside body of experts. These procedural goals were attained, but limits were placed on harmonization. Instead, a parallel regime based on harmonized standards alongside national standards was instituted with a complex pattern of participation of national‐level advisory groups and decision‐makers in EU‐level and international‐level decision‐making. In the course of generating these procedures, the EU's accounting policy defined the parameters of the fundamental relationship between European governance forums and the member states and the international body. This makes it the most complex regime of all.
After winning approval for the launch of the Financial Services Action Plan (FSAP) in 1998, the Commission brought the Council and the Parliament to bring accounting standards closer in line with those of the international community. In this case, international standard was interpreted to be the IAS and the International Financial Reporting Standards (IFRS) as set by the IASB in London. The thrust of IFRS was, and is, to provide a clearer view of the current market value of all assets and liabilities that the company has. This constitutes a different approach from that of the generally accepted accounting practices (GAAP) in national jurisdictions, which prescribe differing degrees of transparency and averaging the value of assets and liabilities for reporting, dividend calculation, and taxation purposes.
European accounting legislation is considerably shaped by two pieces of legislation passed in the early 2000s. The first is a directive to change the principles on which financial reporting is based. The second is a directive to adopt IAS and to sort out the participation of the member states and the European Commission in the adoption process.
On principles, Directive 2001/65/EC amended the Fourth and Seventh Directives to permit the practice of ‘fair‐value accounting’. The meaning and reasoning of the Commission are given as
(the ‘fair value’ usually being the current market value of a financial instrument, as opposed to its historical cost). European companies, banks and financial institutions will thus be able to compile financial statements which are understood and accepted worldwide. (SCAD-Plus 2003a).
In principle, this represented an important change in reporting practices. By emphasizing the current market value of a company's assets, liabilities, and (p.226) cash flow, fair value provided information for investors interested in the value of company stock, in assessing the appropriate level of dividends for shareholders, and for institutional investors and other companies interested in launching a takeover bid. By replacing the use of historical values, fair value lifted the veil of uncertainty surrounding the financial performance of the company's management. This degree of transparency comes at the cost of higher volatility in the net worth of a company, one of the arguments unsuccessfully used by company managers to fend off fair value's introduction. The 2001 directive represented a gain for investor interests with the assistance of the EU and one that national governments had undertaken prior to the EU as a part of their policies to attract international investment capital. It reflects a prior shift in the member states toward this principle as part of a general shift toward attracting investment that is found in the FSAP.
IAS Regulation (1606/2002, Amended 2238/2004)
On 13 June 2000, the Commission proposed that all European companies, not just Societas Europaea (SE), be required to publish their financial reports using a uniform set of accounting standards. The standards proposed were to be taken from the rules set down by the IASB, a private body based in London. The reasons cited by the Commission were ensuring the transparency of information for investors, furthering the integration of financial markets in the EU, and improving the access of EU companies to finance. On 19 July 2002, final approval was given to a corresponding regulation (EU 2002), but it did not apply to companies offering financial services, such as banks and insurance companies. This omission was corrected in June 2003 with Directive 2003/51/EC (SCAD-Plus 2003b). Another difference in the final draft was that IAS would apply to company groups, rather than all companies. This meant that the largest companies are subject to it, whilst subsidiaries are not.
In addition to the Commission's stated desire to improve accounting standards in Europe, it also expressed the desire to increase European clout within the IASB in the further development of IAS, and to encourage the United States to move closer to a common position with Europe on IFRS. For this purpose, the EU wanted to have its own seat on the Board's Standards Advisory Council, alongside the delegations from the member states. The regulation set up an Accounting Regulatory Committee to aid the Commission in the assessment of accounting standards (Article 9), but enforcement of IAS standards remained in the jurisdiction of the member states.
(p.227) Ratification of the directive was unproblematic, given the breakthrough already made on promoting shareholder interests in the FSAP. The European Parliament (EP) gave its approval on 12 March 2002, and in April 2002, the ECOFIN Council in Oviedo agreed to shorten the transition period for the introduction of harmonized reporting according to IAS standards, from 2007 to 2005. This was part of a five‐point plan to combat financial crime by managers, auditors, and financial analysts (Deutscher Bundestag 2002a, 23767).
The collective decision of EU member states to adopt the New Accounting Strategy and the IAS regulation reflected a functional response to a common need for increased information to bridge European financial markets, both for normal investing purposes, and to address concerns about fraud and mismanagement by directors. It required adjustment by the member states, involving great changes to accounting law, but not to such a depth that it would have many knock‐on effects in other sensitive areas. Only the largest companies were affected, and the new standards were used for information only, rather than creating adjustment pressure on dividend practices or on national taxation systems. Therefore, it created little reason for backlash in the member states. At the same time, it required the member states to set up accounting standards boards, where they did not already exist, and to endow them with the statutory mandate to read accounting standards and represent that member state within the IASB in the future development of IFRS. Therefore, it imposed costs, but fruitful opportunities for ongoing influence in the future.
The move won quick approval from the member states, including the German and British governments, as IAS standards had been allowed for domestic firms for at least six years when the Commission tabled the proposal. The fact that the two countries had differing ways of dealing with discrepancies between national GAAP and IAS is, in this context, irrelevant. The important point is that the import of IAS as an accounting standard in some form was already accepted and standard practice, so that concerns about the role of the state in setting standards (in Germany) or allowing national accountants' chambers to set them (in the United Kingdom) had already been dealt with. As the national chapters discussed, each country had different regulative norms on this (the private sector playing a much larger role in defining national and IAS rules and choosing which one to apply in the United Kingdom; the opening of standard‐setting consultation to the private sector in Germany, coupled with a choice of international or German standards), and different constitutive principles (a state legal structure that restricted itself to setting principles of good accounting in company law in the United Kingdom, and one that provided the entire structure in Germany) (p.228) that were, nevertheless, adapted to allow for the informative use of internationally set standards. The key here in the regulative debate at the national level is the informative use of IAS, which does not otherwise challenge reserve powers of the public hand, whether robust (in Germany) or minimal, almost laissez faire (in the United Kingdom).
The most recent change to this decision‐making structure has been to bring the private sector into the policy deliberation process. Specifically, accountants from many member states had organized themselves since March 2001 into a pan‐European organization called the European Financial Reporting Advisory Group (EFRAG), the purposes of which were to create a voice for the private sector on the European adoption of IAS and to advise on the impact that IAS adoption would have on the accounting standards of the EU member countries.
In the words of the EU,
EFRAG provides opinions on whether the standard or interpretation to be endorsed complies with the Community law and, in particular, the requirements of Regulation (EC) No 1606/2002 as regards understandability, relevance, reliability and comparability as well as the true and fair principle as set out in Council Directives 78/660/EEC (2) and 83/349/EEC (3). (European Commission 2006, preamble)
The Commission remained cautious about consulting with EFRAG but eventually agreed to consider an institutionalized form of interaction. The Commission never questioned the institutionalization on the basis of accounting expertise, but rather on its intentions with regard to accounting standards. In other words, accountants would not be entirely accepted as honest professionals but seen through the archetypal lens of potential opportunism and, therefore, in need of regulation to pursue public interest. In 2006, it set up a panel to advise it on EFRAG's objectivity and neutrality, called the Standards Advisory Review Group. The Commission made it clear that it valued the independence of the organization from capture and a balance of backgrounds in the organization's personnel alongside expertise in technical matters. These were designed, as is normally the case for corporatist involvement of lobby groups in the Commission's consultation process, to ensure that the organization represents what it claims to on a Europe‐wide basis (ibid.).
IASB and Europe
Delegation of standard‐setting to the IASB takes place indirectly. Nevertheless, delegation does occur and implies not only the introduction of changes (p.229) in accounting standards, but structural changes to the governance of accounting standard‐setting at the national level. There have been changes to the European level as well. This section looks at the IASB's development, its own perceived relationship to the EU and the member states, and the manner in which the latter two groups have acted to shape the relationship in turn.
The IASB first came into existence in 1973 as an association of accountants from the English‐speaking world with the intent of developing internationally recognized principles of accounting practice, at that time under the name of the International Accounting Standards Committee (IASC). These principles were by no means specific rules, but reference points against which the accounting and auditing community could develop GAAP in its respective national contexts.
The Board issues and manages three types of standards: IAS, IFRS, and Interpretations. IAS are the forty‐two International Accounting Standards that set out general principles of sound financial reporting. IFRS are the seven International Financial Reporting Standards that have been issued to provide more detail about the intended application of IAS, and to expand on issues not covered by the IASC before it handed over rule‐making authority to the Board in 2000. Interpretations are detailed rulings of the International Financial Reporting Interpretation Committee, which had generated eight rulings as of late 2006.
During the 1990s, pressure built from a number of directions to upgrade the Board from a collegial association to an authoritative international standard setter. The 1990s was a decade in which the problem of large‐scale corporate collapse put financial reporting on to the political agenda of most political economies. Britain was hit in 1989 with concerns about the ability of financial fraud and mismanagement to undermine the solvency of large companies, but corporate collapses elsewhere in the developed world put accounting standards on to the public agenda. Then in 1997, the South East Asian financial crisis that then spread to Russia and Latin America with disastrous consequences made the concern with financial reporting global.
One of the key reactions to this demand for action came through the International Organization of Securities Commissions (IOSCO), which also represents European financial market regulators and officially demanded that the IASC increase its international influence and the size of its rule book in order to develop consistent standards for use everywhere. The IASC reacted by turning itself into a foundation (IASC Foundation, IASCF) responsible for (p.230) oversight and recruitment of members of the new IASB in 2000. IOSCO greeted this move, but deemed it insufficient and demanded more changes so that the Board would work efficiently and authoritatively to establish internationally recognized standards. The response was a new constitution in 2005,1 which has since proved controversial among private and public actors, precisely because of the Board's new powers.
The IASCF has twenty‐two trustees, six respectively from Europe, North America and Asia, with another four trustees at large constituting the remainder. All of the members are accountants and chief financial officers who replace themselves by appointment within the policy community. They select the fourteen members of the IASB from a pool of similar candidates, with the difference that expertise in various aspects of the accounting business is the key stated qualification. The constitution of the IASB identifies these groups as preparers (chief financial officers [CFOs] of companies), auditors (who review the reports of the CFO), and users (investors, in this case, institutional investors with the size to be representative of investor interests). In practice, however, the first two groups are effectively the only ones represented. Geographical distribution and various stakeholder interests in company reporting, such as unions, are not written into the Board's talent pool.
The Board is responsible for issuing new standards and approving interpretations by the International Financial Reporting Interpretations Committee (IFRIC) for general use. Therefore, it has sole authority over standard‐setting, regardless of the advice taken elsewhere. This directly affects the work of IFRIC, and another larger body, the Standards Advisory Council (SAC).
IFRIC has twelve members appointed by the Board and drawn from the auditing and accountancy professions, despite the constitution's stated desire to attract candidates from a broader pool than the Board itself. This puts the Board in the position of balancing the demand of IOSCO to generate more rules and the demand of the accounting profession and auditing firms to refrain from rule‐making whenever possible. As with the Board, there are no special provisions for European members or any other geographical group to have a given number of seats. Deemed expertise plays the most significant role in recruitment. The nature of its work makes its results important to a slightly different group of users, including financial market regulators and tax authorities affected by these rulings in a way that would not be the case if principle‐based standards were being issued.
(p.231) As its name suggests, the Board consults the SAC on the impact of proposed standards. The SAC is required by the constitution to have at least thirty members, and has well over forty at any given time. It is more geographically diverse than the other bodies, and although it is still dominated by representatives from developed countries, other members are also present, particularly from newly industrialized countries. Beyond this geographical component, however, it does not reflect a much more diverse range of interests in reporting standards than the Board or IFRIC. It is strongly dominated by accountants and auditors. The one key difference is that traditional international organizations with an interest in accounting standards, that is, those collectively representing national governments, have seats as well, either as direct members or with observer status. The IMF, the World Bank, UNCTAD, the Basel Committee, and IOSCO, are members of the SAC. The European Commission has observer status, which prevents it from taking a more prominent role in discussing standards before they are released. The EU tries to make up for this deficit by pursuing direct institutionalized links with the Board.
The American standard setter, the Financial Accounting Standards Board (FASB), has a contractually agreed special relationship with the Board that gives it influence in setting IAS and IFRS beyond the presence of five American trustees. Board activity on standard development is carried out in working groups, normally in explicit cooperation with the FASB, and occasionally in cooperation with the Japanese counterpart. Given the prominence of the New York capital market in the global economy, the IASB endeavours to ensure that standards can be brought together as closely as possible. The FASB also appears interested in minimizing the gaps between FAS and IAS, which would minimize deterrents to foreign businesses from listing in New York, and simplifying the accounting work of US‐based multinational corporations. In 2002, in the context of the Norwalk Agreement that outlined the special relationship between the two bodies, the IASB and the FASB launched the Short‐Term Convergence Program. This research program is designed to seek all means of minimizing the gaps between the two standards, and is led by the Canadian Accounting Standards Board. Canadian regulators see in long‐term convergence the opportunity to reconcile what they see as superior accounting standards in IAS with the reality that Canadian businesses seeking to raise capital by listing on the New York stock exchange must issue their accounts in FAS.
This relationship has attracted the criticism of European actors and some global ones in the private and public sectors on the basis of unequal access to the decision‐making process, and also because the United States has no intention of adopting IAS. It only recognizes its own standards (FAS) for use in the American market.
(p.232) Constitutional Reform and National Standard Setters
The IASB's constitutional reforms in 2000 and 2005 stress its independence, the private heritage of the standard‐setting experts, and the direct effect (in principle) of its standards. The IASB made its first run at constitutional reform in 2000, around the time the Commission made its first proposal that IAS be adopted for Europe. That reform was criticized for not going far enough. IOSCO, in particular, demanded a more robust capacity for the Board to take authoritative decisions based on the expertise of the private sector that would produce standards that could be directly applied. The constitutional reform of 2005, therefore, dealt with two issues of direct interest to the EU's accounting standards system. First, it laid out a more explicitly hierarchical relationship between the Board as the generator of standards and the national standard setters as bodies to adopt and implement them. Second, it strengthened expectations that the Board would generate detailed and binding accounting rules through enhanced reliance on IFRIC.
The relationship that the Board saw between itself and the national standard setters generated controversy, particularly in continental Europe, where the state had traditionally set accounting standards through the commercial code. In 2005, the Board's policy statements made it clear that it expected national standard setters first and foremost to apply standards established in London and communicate these standards to any public officials that might have an interest in the standards and their implications. Communicating these standards to private actors, that is, companies and investors, was implied by this model as well.
Neither Germany nor the United Kingdom raised substantial objections to this model, largely because they had already accepted the use of IAS in some form before the Commission had proposed extending its use for the EU as a whole. They had different ways of dealing with the implications of decisions taken by the Board, however.
The UK standard setter, the Accounting Standards Board (ASB), effectively decided to align British standards to IAS. This decision was facilitated by the similar background of the ASB and the IASB members. Both were drawn from the accounting profession and from practitioners in private industry, with a considerable number of IASB members having a British background.
The decision to align British and international standards was also facilitated by the supportive attitude of the Treasury under Gordon Brown, which retained ultimate responsibility for the oversight of standard‐setting in the United Kingdom. The Treasury took the governance of reporting standards seriously as a public policy issue, both for promoting the attractiveness of (p.233) the UK financial market for investors, and for providing some measure of consumer protection. At the same time, however, it sought to minimize the regulatory burden on businesses. The alignment of United Kingdom and IAS standards made this possible.
The German response was more complex. In 1994, the CDU/CSU/FDP government had legalized the use of company accounts using IAS or American standards for company reporting. As in the United Kingdom, the use of IAS was designed to make German companies more attractive to international investors, whilst the use of American standards was designed to reduce the transaction costs for the few firms listing their shares in New York. At no time, however, did German legislators intend or support the displacement of German standards as set out in the Commercial Code, which is used for tax purposes. The standards would continue to exist side by side, and the German state would continue to set German standards as before. The difference is that the government would have a context of private sector discussion around German and international standards in which future discussions of German standards would take place, so that an approximation of standards over the longer term would become easier and more likely. The adoption of IAS through the EU's directive changed nothing about this arrangement, meaning that there were neither distributive consequences nor implications for the competence of the German government to continue to set the rules ‘that matter’.
What the adoption of IAS changed for the German system was the establishment of two private standard‐setting boards for the purpose of interacting between the IASB and the German government. The German Accounting Standards Board (Deutsche Rechnungslegungsstandardskommittee, DRSC) was established in 2003 to represent the opinion of the German accounting profession to the IASB. The German Standardization Council (Deutscher Standardisierungsrat, DSR) was established in 2003 to advise the German government on the implementation of new and existing international standards. The creation of these bodies ensured that a German voice would continue to be heard within the IASB, but with a distinct private sector accent, rather than the public one emanating from the economics and finance ministries responsible for legislating changes to standards in the Commercial Code.
The most vocal opponent of this model in continental Europe was not Germany, but France. The French standard setter and the Ministry of Finance that oversees it insisted that the national standard setters would have to have input into the standard‐setting process at the Board level if the latter's decisions were to be seen as legitimate. The French did not demand an advisory role through the Standards Advisory Council but rather direct links between the Board and the national standard setters that would allow demands to flow upward as well as downward.
(p.234) European Commission–Board Relations
The European Commission made its own constitutional demands on the IASB that clashed with the demands made by IOSCO, which also represents the securities regulators of the member states. It found itself compelled to stake a position on the relationship between the IASB, the member states, and the EU as a whole. It took a similar view to that of the French government in demanding the right to more input into the Board's decision‐making process. Its position was different from that taken in Paris, however, in that the Commission foresaw its own role as a collective actor representing all of the EU member states taking precedence over the latter. It specifically demanded a special relationship with the Board on consultation and convergence of standards equivalent to that enjoyed by both the American and Japanese Accounting Standard Boards.
Similarly, the Commission would not accept the direct application of IAS for use in the single market, but argued and won approval for a European IAS Directive that would allow it to approve standards for use in conjunction with the EU Accounting Standards Committee, created for this purpose. The Committee would incorporate public officials from the member states responsible for overseeing accounting standards, hoping to channel and aggregate their demands in this way.2
Private Sector Involvement
The private sector soon demanded official representation on the EU's Accounting Standards Committee, legitimized by their expertise as practitioners, preparers, users, and auditors of company reports. Accounting companies began to argue that EFRAG should be integrated into the process of decision‐making at the European level. This did not prevent EFRAG from arguing to the IASB that it should be ‘the body that expresses European positions on matters related to its standard‐setting and that EFRAG should be given a status commensurate therewith’ (EFRAG 2004, 3). The private sector therefore argued for a degree of pre‐eminence over the Commission that it did not achieve, even if the latter agreed in 2006 to formalize its consultations with it.
(p.235) Interpretations Controversy
Even more than the status of the Board itself, the role of IFRIC and expectations that it would generate detailed and binding accounting rules have been generally controversial. Specifically, the Board intended to set up a hierarchical relationship between IFRIC standards and national standards and standard setters that generated resistance. One of the aspects of IAS and IFRS that makes their acceptance so easy for national standard setters is that they are based on principles. This means that they are compatible with a considerable range of specific accounting practices and rules. The IASB is well aware of this and seeks to promote the adoption of its standards by contrasting them with the more restrictive rules found in Commercial Code countries and in the United States. On the other hand, the real consequence of IOSCO's demand for more and more detailed rules points to the enhanced use of IFRIC Interpretations.
IFRIC Interpretations are, by their very nature, more detailed than IAS and IFRS, to the point where they no longer constitute principles but concrete rules that national standard setters and the EU would have to implement. This made the stakes apparent for those concerned about the room for manoeuvre in local accounting standards that Interpretation development would permit. The fundamental strategy for choosing between the hierarchy of the Board and the flexibility of standard development and application is still under development. The main debate in the international community appears to have taken place outside the confines of the EU. Most national standard setters in the Organization for Economic Cooperation and Development (OECD) world, including those of Germany and the United Kingdom, support the Board's position that (a) Interpretations should be issued sparingly, and (b) national standard setters be barred from issuing their own ‘local interpretations’ of IAS. Developing countries and Italy had pleaded for local interpretations to allow for what are broadly considered eccentric and opaque accounting techniques, but found little support in the broader accounting community on the grounds that it would hopelessly fragment international standards and undermine the universal informative function they were designed to fulfil in the first place. Instead, the majority argued for sparing use of Interpretations to avoid the development of binding rules that would require strong adjustment. The Big Four accountancy companies supported standard setters in this position, arguing only for the Board to develop guidelines, which would strengthen the bargaining position of standard setters and auditors vis‐à‐vis corporate chief financial officers, but which would not constitute rules that could restrain flexibility.
The German, British, and European Commission responses to IFRIC are coordinated rather than simply individual. Like IAS and IFRS, IFRIC (p.236) Interpretations are subject to EU screening and adoption before they take force in the single market. Therefore, the Accounting Standards Committee has an opportunity to discuss and screen the impact of these standards. In doing so, they can call on the technical advice of EFRAG. This group consists of private actors and associations that view IFRIC Interpretations with some scepticism, but it is precisely for this reason that the IASB issues so few interpretations (Donnelly 2007). When the EU wishes to make a petition to the IFRIC Committee, it relies as well on a round table of experts, in which the German and British standard setters are also represented.
The European Commission created a round table of accounting experts in 2006 to serve as a listening post for accounting issues that could be of interest to all members. Its purpose is particularly to avoid drift in national standards. It could then identify and group together those issues where it is felt there is a real risk of divergence and recommend which of those should be taken up by IFRIC as a matter of urgency. It wanted to include stakeholders, but as few as possible. In particular, it stated that ‘representatives from IASB, CESR, EFRAG, FEE, UNICE, audit firms, National Standard Setters, preparers and the Commission should therefore all be present’. Above all, the round table would complement the work of the EU Accounting Standards Committee (which deals with the application of IAS) by helping to draft technical papers for submission to IFRIC if European accounting standards experts have a ‘common concern’. The national standard setters of the United Kingdom, France, and Germany were made standing members of the round table due to their intense involvement with IAS, and standard setters from other EU member states on an ad hoc basis from time to time.3
There are three useful insights to be gained from looking at the standards themselves. The first is the breadth of material that is covered by them, so that we have a sense of how extensive the commitment is that the EU and its member states have entered into. The second is that some principles of IAS tell us how much change from pre‐existing national standards is implied. The third is a case in which the EU negotiated a special European treatment for a particularly important kind of financial instrument that was at the heart of the FSAP and which constitutes a specifically European kind of thinking (p.237) about the financial market per se and the need to restrain and regulate accounting practices. The European solution is somewhat more restrictive than that found in IAS.
The changes in accounting standard principles toward fair‐value accounting described above stress information that is useful to investors and above all, prospective investors, as it stresses the current market value of assets, liabilities, and income. This means that other goals, including the building and management of financial reserves to smooth income fluctuations or cross‐subsidize social and economic goals within the company, are exposed for what they are. Management is then, theoretically, more exposed to investor pressure to pay out dividends with cash or assets in reserve or to investor criticism when particular assets drop in value. Fair value therefore strengthens the logic of market decision‐making between the firm and the market, rather than strengthening the interaction between management and its internal partners (such as block‐holding investors or employees). It moves away from stakeholding and rent‐seeking arrangements that are mandated or tolerated and forces compliance with a pro‐market norm.
The ability of the EU to insist on its own approach to dealing with IAS was demonstrated in a dispute that was essentially over the choice between a laissez faire system and one of regulated market capitalism. A key dispute within the EU and between the EU and the IASB was how extensively fair value should be used. The EU directive, building on earlier accounting directives, instituted the principle that fair value, like other IAS provisions, does not have a direct effect in all areas of accounting, but only applies to those areas for which the EU has agreed its adoption (European Commission 2005, 2–3). In the future, this means that the member states through the ASB, the accountancy profession through EFRAG, and the Commission, all have a role in deciding how extensively fair value will be applied.
This was a particularly sensitive issue in the use of accounting standards for derivative financial instruments. Due to their complexity and invisibility on accounting sheets in the United States, the accounting of hedging with derivatives played a key role in American corporate collapses and, therefore, was a key regulatory issue internationally. The IASB demanded fair value and (p.238) transparency of all derivatives off the balance sheet (where they were not visible until then), placing these items in a version of IAS 39 that was revised in 2003. The EU supported this move toward mandated transparency generally, signalling a movement away from laissez faire and toward regulatory capitalism. At the same time, lobby work by the European Banking Federation eventually moved the EU to prevent application for their own sector (European Commission 2004g, 3). This is now referred to as a special ‘carve out’ of IAS 39 that allows application for normal companies, but continued exemptions for the banking sector.
All of this means that the EU has built on a previous shift in thinking at the national level toward accepting and even promoting the use of IAS as a means of attracting international investors. There is also a shift toward mandatory exposure of the company's finances that is different from the past. IAS may one day be used entirely in the EU, but for the moment, they are used parallel to national standards. Whether IAS actually replaces national standards is up to the member state in question. For the moment, this is not the case, even if the parallel system encourages delegation to reduce transaction costs for business.
The accounting standards regime amounts to a significant, yet limited delegation of authority for setting accounting standards from the member states or their national accounting associations to the IASB. This delegation formed a key component of the European Commission's broader FSAP, as it provided a means by which transparency for investors in the single market could be achieved. A single accounting standard would make company reports comparable for the first time, replacing the patchwork of private practices and public commercial codes traditionally used for presenting accounts.
We can see that the regime for IAS is handled differently than financial market regulation when we look at the limited detail of international standards, the successful resistance of national governments, the European Commission, and private industry to IASB plans to introduce a more rule‐based system of standards, and the layering of international standards on top of national ones, rather than displacement. As a result, the regime for accounting standards is a regime for information first and foremost. Any further changes will take much longer to materialize. This means that the constitutive norm consequences for the member states are different depending on how strongly and exclusively they orient their own remaining national standards to EU‐sanctioned IAS. The regulative norms that layer IAS allow for this. The (p.239) public–private element of the state's constitutive norms also varies, as it does between the United Kingdom and Germany, preserving difference in state attitudes toward the accountancy profession at the same time that commitments to employ IAS and place accountants under independent regulatory supervision (under EU law) are made.
There is, in each case, a constitutive moment for a national regulator but these are different in the United Kingdom and Germany, so that state or private dominance is accommodated in the EU. The main issues were regulative at the EU level, sorting out the roles of the various actors.
One mechanism by which future changes are likely to occur is the collection of national accounting standard setters that the EU member states have established as part of their involvement with the IASB and with the Accounting Standards Committee of the EU. Particularly in countries with a tradition of using the commercial code as a set of accounting standards, the active involvement of accounting professionals from a variety of backgrounds is bound to produce demands for different outcomes than would have occurred if only legislators and industrial lobby groups had been involved. Furthermore, the more transnational interaction of these expert groups through their interaction with the Board, with EFRAG, and with the EU's Accounting Standards Committee means that the agenda for harmonization is likely to grow. At some time in the future it is conceivable that national‐level change will sow the seeds for further delegation and harmonization of national rules, but that time has not yet come.
(1) The discussion here is based on the constitution of 2005.
(2) That is, both on the issue of whether adopting an IAS standard is acceptable, and on what demands should be made on the Board.
(3) European Commission, Internal Market and Services DG (undated) Memo: Consistent IFRS application: Roundtable, 1–3.